Morgan Stanley's reduction of commercial paper proves difficult

JedHorowitz

NEW YORK (MarketWatch) -- Morgan Stanley
MS, +0.76%
is seeking a reduced credit line to back up its commercial paper but is finding it tougher to negotiate the deal.

The investment bank deliberately cut its reliance on commercial paper - short-term debt used to finance its daily businesses - because jittery investors in today's unstable markets want investment banks to have cash or longer-term sources of funding.

Morgan Stanley's available liquidity - cash and cash equivalents - increased to an average of $123 billion during its first quarter that ended last month, from $85 billion in 2007, said Mark Lake, a company spokesman. As a result, it cut the amount of commercial paper it issues, as well as the so-called "backstop" bank line required to ensure investors in commercial paper that it can pay them back.

When word of the reduced line hit the market, some traders feared that Morgan Stanley was having trouble getting funding. Bear Stearns Cos.' (BSC) near-collapse occurred because it ran out of liquidity - cash to support its businesses - when nervous clients stopped trading and investing with the bank.

Morgan Stanley insists that it is not in the same situation.

"We have proactively reduced our commercial paper outstanding from an average of $25.3 billion in 2007 to $16 billion now," Lake said.

Its previous backup line, from more than 20 banks led by JPMorgan Chase
JPM, -0.31%
was $11 billion. Lake wouldn't comment on how much it now seeks, but a source confirmed an earlier report from Reuters that it is about $7.5 billion. The banks, still led by JPMorgan, are said to be offering about $5 billion at higher fees than charged in the previous deal.

A spokesman for JPMorgan declined comment.

The tougher stand is a sign of how stingy banks have become, even with their top customers. In stable credit environments, banks issue commercial-paper backstop lines primarily as favors.

The lines carry low fees and the banks rarely collect interest because the lines are seldom drawn. Morgan Stanley has never drawn on its commercial-paper backup for business purposes, Lake said.

Shares of Morgan Stanley fell 2.1% on Friday to $44.74, in line with a drop in most other large investment banks.

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